Disney Set for Another Street-Beating Quarter

by Dan Burrows | February 5, 2013 9:28 am

TV, movies and theme-park juggernaut Walt Disney (NYSE:DIS[1]) reports earnings after Tuesday’s closing bell, and if recent history is any guide, an upside surprise could put the stock back at all-time highs.

Disney, a component of the Dow Jones Industrial Average, notched a record close of $54.59 on Feb. 1, capping a 52-week run that has seen shares gain 35% vs. an 11% increase in the S&P 500.

The stock tumbled more than 1% Monday as part of the triple-digit selloff in the Dow, as the crisis in the eurozone once again reared its ugly head. But that might well prove to have been an opportunity to accumulate shares at a discount if Disney keeps up its Street-beating ways.

True, the company is expected to report a decline in fiscal first-quarter earnings, to 76 cents a share from 80 cents a share in the prior-year period, according to a survey by Thomson Reuters. And that would come despite a revenue gain of 4% to $11.21 billion from $10.78 billion in last year’s fiscal first quarter.

But don’t be shocked if Disney beats Street estimates. It’s a better-than-even bet that the company will even surprise with flat or rising profits. After all, Disney has exceeded analysts’ estimates for six straight quarters by an average margin of about 5 cents a share.

It also wouldn’t leave us slack-jawed if Disney surprised to the upside with its outlook. From the theme parks to the movie business to TV — especially TV — the future is looking very bright, which is why the market has sent DIS shares to record levels.

After languishing during the depths of the recession and early recovery, theme-park attendance has bounced back smartly, and guests are dropping more cash during visits. Partly that’s a reflection of a better economic environment, but Disney also gets credit for the heavy investments it’s made in its parks and attractions.

Meanwhile, the movie business has a number of highly anticipated catalysts. Disney’s acquisition of the Star Wars franchise has been getting all the ink, but don’t forget that it has a slew of other tent-pole sequels and new franchise projects coming up, including Thor 2, Captain America 2, The Good Dinosaur, The Lone Ranger and Iron Man 3.

However, the real money-maker is ESPN, a cash cow if ever there was one. In the era of cord-cutting and commercial-skipping, ESPN is an advertisers’ dream — meaning Disney holds all the cards when it comes to pricing power.

As David Miller, an analyst at B. Riley & Co., puts it in a note to clients:

“By the end of F2013, DIS should have re-negotiated all affiliate fee (cable company) contracts for ESPN, and will get what it wants, because sports programming is essentially DVR proof and ESPN is a ‘must-have’ network.”

Indeed, ESPN is a mighty engine of profits — one that’s still revving up — because it can charge carriers such whopping premiums for carriage. By some analysts’ reckoning, the cable-sports channels contributed nearly 30% of Disney’s operating earnings last year.

Even after the epic run-up in the stock, Disney trades at just 14 times forward earnings, essentially in line with the broader market, despite having stronger growth prospects.

Between the reasonable valuation and very good chance of beating Street estimates when it reports, there ample reason to expect Disney to get a big boost from earnings release.

That is, if the eurozone and the rest of the market let it.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.